Investing is more than just a way to increase your wealth. What you might not know is that your investment choices can potentially make the world a better place as well. To do that, you’ll need to place your funds in the right place to support the right brands. In this case, this means supporting brands that have ethical practices and those that help solve social problems.
At first, glance, adding ethical income funds to your assets can seem intimidating. However, it’s a lot easier than you think. Whether you’re new to investing or are a veteran, diving into ESG stocks isn’t exactly rocket science. Here are some ways you can start adding ethical income funds to your wealth.
Ethical Investing Defined
Let’s first talk about what ethical investing really is.
This is defined as a strategy where you choose investments depending on your personal ethical code. To put it simply, this means investing in brands that leave a positive impact on the world. These include those that focus on using sustainable energy or those that help the society around them.
What’s ethical is subjective. What could be good to you, may not be good to someone else. Although there’s a general idea of what “good” really is, it’s still important that you understand what YOU stand for before diving into ethical investing as that can help you find the better investments.
There are three steps that will help you set up your own ethical investment portfolio. It all starts with answering a very important question: what do you consider as good?
- Defining Good
As we’ve said, the definition of what’s good varies from person to person. This is why it’s important to first understand what you personally want to prioritize as something that’s good. There are a lot of pressing issues in the world right now and it’s understandable that some people want to solve some problems first over anything.
Ethical investing primarily relies on the ESG system: environment, social, and governance.
A good way to start defining what’s good is by giving yourself some time to understand what each of the three pillars stands for. Environment stands for the steps a company makes when it comes to serving the earth and its resources in its best interest. Social refers to projects that relate to social issues such as racism and gender inequality. Governance refers to how a company handles its workers and its board members.
- Getting Your Money In
There are two ways to become an investor with an ethical portfolio. You can first start by becoming a retail investor who adds ESG stocks to your list of assets. This might seem simple enough but bear in mind, not all companies are considered as having done moral good.
As a retail investor, you’ll have to do a lot of the research on your own. Luckily, ESG reviews and ratings for nearly every major brand are readily available online. Some investment firms even share their own ESG reviews and scores for the retail investor to see online.
Financial institutions all carry their own ESG criteria. To put it simply, this is a set of standards that the firm looks into when it comes to screening companies for ethical investment.
For instance, one firm could put more value on companies that aim on reducing CO2 emissions over those that use renewable energy. As each firm has its own set of criteria for ESG ratings, it’s something that you can do for yourself too. We suggest creating a checklist for the three pillars of ESG – environment, social, governance. To get you started, here are some of our picks:
- Carbon emissions
- Proper waste management
- Sustainable sourcing of raw materials
- Biodiversity and land management
- Use of renewable energy
- Impact of environmental footprint
- Makes use of ethical supply chains
- Supports racial and LGBTQ+ rights
- Steps towards office misconduct and sexual harassment
- Pay grade and benefits of employees
- Provisions for workplace safety and labor
- Diversity of board members
- Transparency of corporate reports
- History and background of corporate leaders
If this is too much work for you, there are two alternatives you can consider. The first is having a broker from an investment firm manage your assets for you. This is a more seamless way to invest ethically.
The common misconception here is that you’ll have little to no influence on the investment that will be done with your funds. However, you can still directly coordinate with your broker to help build your portfolio a lot easier.
The other option would be to go for robo-advisors. This is basically AI software that invests in companies based on a set algorithm. Robo-advisors can also sort out potential investments based on their ethical decisions too. While a lot easier to do, robo-investors give you less freedom on what you will invest with your money. Here are some robo-advisors that can help with ethical investing.
- E-Trade – Features a portfolio that has ESG ETFs.
- Betterment – Allows you to invest in three impact portfolios – Climate Impact, Social Impact, and Broad Impact.
- Wealthfront – Incudes a pre-made ethical portfolio that you can further customize with ethical ETFs.
- Acorns – It has Sustainable Portfolios that have ethical ETFs. The system is designed to work on par with Acorns’ Core selections.
Ultimately, it’s up to you to decide how your funds will be managed, We suggest going for a broker or a robo-adviser first if you’re a beginner. You can learn to invest on your own as you gain more experience.
- Building Your Portfolio
Lastly, it’s time to build your portfolio. You can go all out and place 100% of your money into ethical investments.
Bear in mind that not all ESG stocks are considered great performers on the market. In fact, ethical investing is seen as a long-term investment instead of a choice that results in quick gains. The key is to make sure that you’re patient and that you’re always up-to-date on the latest results when it comes to your investments.
Ethical funds have been consistent when it comes to performance. It’s most likely because people are growing more concerned about the brands and the companies that they support. You might want to start building your ethical income funds as early as you can.
Is Ethical Investing For You?
There’s a reason why this is one of the most popular forms of investing right now and that’s because the market is constantly changing. As more people see the weight or the impact that companies have on the world, there will always be room for ethical investing.